M&A Litigation Goes Federal

It used to be routine for law firms to file litigation against parties to M&A transactions, alleging among other things inadequate disclosure of material facts and unfair compensation to equity holders of the acquired party.  Many of these suits were lacking in substance and, of course, many ended up in Delaware State Courts by definition.  A “settlement” between plaintiffs’ attorneys and the companies would result in the provision of some additional disclosure, typically of little value to target shareholders, and the only cash compensation would come by way of the extraction of legal fees in favor of plaintiffs’ counsel. 

Companies were relatively anxious to enter into these settlements, paying small sums of money in exchange for a judgment which protected them from future substantive litigation based on actual corporate improprieties.  In a way, merger partners were purchasing future anti-litigation insurance for short dollars.

The Delaware Supreme Court, in a widely reported 2016 decision, put a clamp on this practice by noting in fact that many of these settlements were useless to shareholders and, therefore, not worthy of compensation of lawyers.

Lawyers, being ingenious, have started to bring these claims in Federal Court.  Federal judges, spread all through the United States, do not have experience with such matters.  They do not necessarily follow the Delaware lead.  There has been an incredible proliferation in Federal litigation of this sort.  Many transactions were challenged in multiple jurisdictions.  One law firm was reported, through approximately the end of September, 2019, as having filed 163 complaints in Federal District Courts opposing mergers, alleging inadequate disclosure in all but one of these filings.

One might expect that Federal Courts will end up where Delaware ended up for the same reasons of administration of justice.  However, no one has a fix on the timeline.

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